Chinese investment in the extractive sectors in Africa (methods, profitability, and deal flow) - Research Paper Example

?CHINESE INVESTMENT IN THE EXTRACTIVE SECTORS OF AFRICA: STRATEGIES, PROFITABILITY AND DEAL FLOW Introduction……………………………………………………..2 Strategies of Entry…………………………………………….2 The China-Africa Development Fund ……………….3 Deal Flow………………………………………………………….3 Profitability……………………………………………………….4 Conclusion…………………………………………………………5 Works Cited……………………………………………………….6 Introduction Sino-African relations were taken to a different level in 2006 when the government of China announced a wide range of co-operation activities between China and Africa including political, economic, education, culture, health as well as military co-operations (Meine 184). The main document of the 2006 China-Africa Co-operation conference attended by 46 African leaders stated that “peace and development remain the main theams of our time”. It therefore took the initiative to support African economies to attain this end. The government promised to do this by supporting local African nations in their development projects. This is complemented by support to Chinese enterprises to trade in Africa and provide preferencial loans and buyers’ credits to these traders (Meine 187). One of the main financial intermediaries used by the Chinese government to pusue this end is the China-Africa Development Fund. China sees Africa as a strategic location where it can acquire oil and minerals (Konings 341). China has therefore attempted to create a symbiotic relationship whereby they can help and at the same time benefit from the abundant mineral and energy resources on the continent. This paper examines the strategies used by China to enter the various African extraction markets. It goes further to look at the China-Africa Development Fund . It then looks at the various expansion into the extractive industry of the continent by examining deal flows and profitability of these Sino-African mining and drilling ventures. Strategies of Entry The main strategy used by China to enter the African extractive markets is through the leveraging of state resources through support to African governments on one side and the empowerment of Chinese mining and exploration companies working in Africa (Rotberg 152). The Chinese government maintains close ties with African governments on the political, economic, human resource and security development of these nations (Dubosse 70). Politically, the country sends high level delegations to meet leaders on the African continent and by this, they maintain strong ties with high-level Chinese government units. Economically, China promotes trade , investment and the development of infrastructure on the continent for the mutual benefits of China and Africa. Human Resource Development is done in the form of scholarship for some selected Africans to study in China and other parts of the world and also through grants and scholarships for African students. In terms of peace and security, China provides support for various national militaries and also contribute immensely to peacekeeping operations on the continent. Collectively, these strategies and systems allow Chinese businesses to get contracts in the energy and mining sectors of various African countries. The China-Africa Development Fund The China-Africa Development Fund (CADF) was officially launched in June 2007 as a branch of the China Development Bank to act as an investment facilitation vehicle for the Chinese expansion to Africa (CADF Website). According to the official website of the CADF, the equity fund is to provide loans and funds to Chinese businesses operating in Africa and since its inception, it has supported more extractive drives than any other sector. Every loan or funds released by the CADF must have a good justification as being beneficial to the State and it is guaranteed by the Chinese government (Taylor 79). The CADF began with $1 billion in funds that was used to pay for Chinese ventures and expansion drives into Africa (Wang 57). However, the CADF website indicates that the fund will provide another $5 billion in preferential credits, FDI and technical assistance in Africa. Deal Flow The website, beijingaxis.com states that between 2007 and 2009, 80% of the over $120 billion trade over the three year period was attributed to the extractive sector (that is mining and petroleum industries). This therefore means that extractive sector is a very vital economic activity for the Sino-African trading sector. China is the world’s largest consumer of copper and it consumes about a quarter of the world’s copper produced however, it does not have copper deposits within its borders (Streifel 7). Also, China has to look to Africa for its petroleum and natural gas needs. Due to this need, China has created a strong link with African nations that have deposits of these natural resources. For the supply of copper, China has created very strong links with Central and Southern African nations that have abundant deposits of the mineral like Zambia, Zimbabwe and the Democratic Republic of Congo. One of the most conspicuous attempts it has made has been to construct major railway networks to the various copper mines (Rotberg 150). China has created the Tanzam line that links the copper mines of Zambia to the coast. They have also created the Benguela railway line that runs from Angola Zambia and DRC to the coast. These major railways connect the various Chinese mining centres with the shipping ports to ensure the easy and convenient transportion of extracted copper ore to the Chinese coastlines. China also focuses on gaining important rights to the explorations and stakes to offshore oil and gas centers (Taylor 70). These bids have been successful in Sudan and in Angola, where the grants and aids are tied to exploration rights to oil fields (Rotberg 81). In other parts of West Africa, notably Nigeria, Ghana, Liberia and Sierra Leone, the Chinese government has also been successful in using its economic grants as a stepping stone to secure major contracts in the mining industry. They have petroleum exploration rights in Nigeria, gold mining rights in Ghana, iron ore mining rights and diamond mining rights in Liberia and Sierra Leone respectively ((Dent 4). However, serious drawbacks in field works have been reported against Chinese extractive businesses in Africa. They are accused of building enclave economies only where they have interests, indulging in destructive extraction practices and maintaining poor labour conditions (Brantigam 297) Profitability According to AFRODAD, China and Angola had a $4.9 billion trade volume between them in 2004 and this rose to $11 billion in 2006 (AFRODAD). This indicates that Angola, which has a major extractive arrangement with China for the export of oil and gas provided a lot of revenue to Chinese firms and businesses. Dubosse also quotes ADB as stating that there was a $40 billion between Africa and China in 2008. Out of this, 20% was attributed to petroleum whilst another 50% is attributed to mining. There are over 200 Chinese major extractive projects scattered across the continent (Dent 8)and these collectively contribute for about 81% of the revenue Chinese businesses earn from Africa (beijingaxis.com). Although China is investing a lot of money into the African economy, it seems that the trading partnership is yielding a lot. Also, there are a lot of loans that have been granted to African governments that will be paid back to the Chinese government and this means that in spite of the fact that African nations are benefiting from Chinese aid now, they will have to pay for the aid in some form in the future. Conclusion Chinese influence is growing in Africa, particularly the mining sector because China uses political, economic, cultural and military aid to create a symbiotic relationship for African countries and Chinese-African enterprises. This makes African nations willing recipients of Chinese investors. Chinese businesses are also supported by the China-Africa Development Fund which is a tool for the support of the Chinese expansion to Africa. China has major deal with Central and Southern African countries with copper deposits as well as other petroleum exporting countries. This contributes a lot of money to the Chinese economy. Works Cited AFRODAD. Mapping Chinese Development Assitance in Africa: An Analysis of the Experiences of Angola, Mozambique, Zambia & Zimbabwe. Harare: AFRODAD, 2008. Brantigam, Deborah. The Dragon's Gift: The Real story of China in Africa. Oxford: Elsevier, 2009. CADF. China-Africa Development Fund. 12 July 2010. 18 May 2011 . Dent, Christoper. China & Africa Development Relations. Abingdon, Oxon: Routledge, 2011. Dubosse, Nancy. "Chinese Development Distribution in Africa: Aid, Trade & Debts." Chinese and African Perspectives on China in Africa. Oxford: Pambazuke Press, 2010. 70 - 81. Konings, Peter. "China & Africa: Building Strategic Partnerships." Journal of Developing Societies (2007): 341-367. Meine, Peter Van Dijk. New Presence of China in Africa. Amsterdam: Amsterdam University Press, 2007. Rotberg, Robert. China into Africa: Trade, Aid, & Influence. Cambridge, MA: World Peace Foundation, 2008. Streifel, Steven. Impact of China & India on Global Commodity Markets. Focus on Metals & Minerals & Petroleum. Washington DC: World Bank, 2006. Taylor, Ian. Forum on China-Africa Cooperation (FOCAC). Abingdon, Oxon: Routledge, 2011. Wang, Jian Ye. What Drives China's Growing Role in Africa. New York: IMF: Africa Department, 2007 Read More